The Stock Market's Problem

Moneyshow's Jim Jubak discusses what he sees as the stock market's current problem and what this may mean once the summer is over.

You could argue that well, a little complacency never hurt anybody. Tell that to the Trojans. The problem right now in the stock market as I see it is that the VIX, which is a measure of how much traders are willing to pay to get rid of risk in the market. The VIX go up as people’s willingness to pay more goes up as the market is perceived as riskier and it goes down when the people perceive the market as less risky.

Right now, it’s at a really, really low level. It’s back to where it was before the 2007 global financial crisis. VIX is a pretty good contrarian indicator that when risk is received as this low, it’s usually a sign that the market is over complacent, that people are not very fearful. The cliche is that a rally or a market that’s moving up climbs a wall of fear.

What happens is as the market moves higher, people who have been on the sidelines and because they were afraid of the market come in. When the VIX is really, really low it indicates there aren’t a whole lot of people ought there who are afraid this market waiting to come. The question is as a rally progresses what you’d really like to see is more money coming in as stocks go higher.

With a VIX this low you’d have to ask well, who’s going to come in? Where is the next group of money to drive this higher? We are after all at all-time historic highs on the S&P so it’s an important question. Right now, it’s August and it’s very hard to tell anything in August. Volumes dry up especially in the last couple of weeks in August as lots of people go away or stop paying attention so it’s not clear that you can draw conclusions from this.

To me right now the market feels kind of listless, looking for direction, some profit taking. My real worry, however, is not August but September when everyone comes back and we suddenly get to focus on the Fed and when it’s going to taper and of course the threat to shut down the U.S. government at the end of September. Those don’t strike me as good things, and I would suspect that at that point the VIX will start to go up which is usually not a good time for stocks in general because that means money is coming out the market as people start to feel that it’s riskier.